5.30 Liability to shareholders and the company

Maxref Ltd is a new dotcom company specialising in online trading in multimedia items such as DVDs, music, online reports and celebrity commodities. It has been listed on the Australian Securities Exchange since last year. As auditor for Maxref's first year's financial statements for the year ended 30 June 2009, you note that the accounts show a turnover of about $10 million, shareholders' funds of $3 million, and a profit before tax of $ 250 000. During the course of your audit you discover that the balance of the sales ledger control account is $500 000 and that about 80 per cent of the accounts receivable are from new customers who bought items online without full details of the banking particulars. You further discover that all online transactions were reported and executed without proper security checks. Moreover, half of the items listed as stock for sale cannot be located. The share price of the company stands at $1.50. You raise the issue with the director of Maxref and he tells you that this is not uncommon with this type of e-business and that he is concerned only that the Australian Securities Exchange allows it to go on trading. He assures you that nothing major will happen; an unqualified auditor's report is all that is necessary. However, you are worried about your own liability.

Required

Discuss the potential liability of the auditor to:

(a)the shareholders

(b)the company.

You may refer to any relevant case law in your answer.